Mortgage and Foreclosure Law Blog

OK, so you didn't pay your second mortgage for at least 6 months, you are upside down in your house, and your second mortgage has charged off to become unsecured. What now? Now, the lender on your second has to decide if and how they want to collect on their loan. They generally have four options: 1) Sell the debt to a junk debt buyer; 2) collect on the debt like a credit card; 3) settle the debt for pennies on the dollar; or 4) do nothing.

Selling the debt to a junk debt buyer is rare in my experience, at least for a second mortgage. If they do decide to do this, they would usually sell your loan and many others at the same time to the same place. Then it is up to the junk debt buyer to try and collect on your loan. It is usually harder to judicially enforce a loan that you are not the lender on. The reason is that many times you don't have the original contracts and other evidence that is needed to win a judicial decision.

More likely than any other option is that the lender will collect on the loan like it is a credit card or other unsecured debt. Usually this means hiring a debt collector first. That is when the real harassing phone calls take place. Generally a debt collector gets paid something like 20% - 25% of what they collect. That obviously gives them an incentive to get money from you. That is why they are often so aggressive.

After a while if they are unsuccessful with the Debt Collectors, they may have a law firm try to collect from you. Things get dangerous at this point. Law Firms generally get 33% to 40% of what they collect. They much less incentive to settle the debt with you because they figure they will just sue you, get a judgment, and collect the whole thing including attorneys fees and court costs. If you get a letter from an attorney's office get help immediately.

The best situation you can get in is to be in a position where you can settle your loan debt. Now, most people get in this situation because they are really tight on money. However, I've seen cases where people were offered to settle their second mortgage for 3 cents on the dollar! Now that is unusual; but 20% or less isn't. It would be in your interest to borrow the money from anywhere to get rid of 80% or more of your debt. Call us if you think you may be in this situation.

I didn't call "doing nothing" by your lender the best situation b/c it is rare they will just give up on it. If they do, it is likely because you are what is considered judgment proof. That means that even if they sued you and won, they couldn't collect any money from you. This is the case if you have no assets, no job, and/or your income is exempt. Exempt income is usually stuff like retirement, social security income, child support, etc.

I've found that this whole subject brings up more questions than answers, so please call me if you are in this situation and need some advice.

Hi Folks. So I want to revisit second mortgages with you. I wrote an entry on this a while back that seems to been very popular. Thus, I feel that it may be time to go over issue with not paying a second mortgage again. Specifically I'd like to go over secured v. unsecured, charging off, collection activity, and even settlement.

What does it mean to have a secured mortgage? In simple terms, it means that your lender can foreclose on your house, sell it, and take the proceeds to pay the debt/mortgage. In other words, your debt is secured by the home. Well that is all good when your home has some equity in it; but what about days like this where home values are depressed?

Lots of folks have purchased homes in the last several years with no money down and a 1st mortgage for 80% of the value of the home and a second mortgage for 20% of the value of the home. I'm running into many folks who have the situation above AND are in some kind of interest only loan. Finally these same people have lost significant value in their home and often owe more on their first mortgage than the home is worth. So are you in a similar situation? At least one where you owe more than your home is worth? That is a situation where a second mortgage can become unsecured.

If you have value in your home the Holder of your second mortgage has to buy out the first mortgage, then foreclose on the property, then sell it before they get their money. They aren't going to do that if the transaction leaves them little to no chance to get money out of the deal.

Let's say you owe $80,000 on your first, $20,000 on your second and your home is worth $75,000. Why would the holder of your second mortgage pay $80,000 to get $75,000 back and still not get their original $20,000? Does that make sense? Of course I am skipping all kinds of other transaction costs in that scenario; but hopefully you get the idea.

When you owe money to a company, they put that amount on the Asset side of their accounting books. This works well when you are paying; but what happens if you can't pay? Well accounting principles say that that business has to put that amount on the liability side of their accounting books. Their other option is to foreclose, and as seen above that doesn't make sense. So when your lender decides to write of the debt v. collecting on it through foreclosure; it becomes unsecured. That is when they will collect on the debt, much like they would a credit card. Next time I'm going to go over what to expect with collection activity on your charged off second mortgage.

First Freddie Mac and Fannie Mae, now the FHA. Most of you, who have been paying attention, know about Freddie Mac's and Fannie Mae's involvement in the mortgage meltdown. To simplify things these institutions were encouraged to make loans to people who couldn't afford them. Eventually this caused the financial crisis we are dealing with today. The real problem with this was the government's own insistence on making loans to low income borrowers. So we learned a lesson right? Nope.

Now the FHA, it appears, just picked up where Freddie and Fanny dropped off. The FHA insured 21.5% of all new loans last year, up from 6% in 2007. That's a huge increase. It appears these were risky loans too. FHA is going to have losses of at least 54 billion dollars. Precedence would tell us that we can expect another bailout within the next 24 to 36 months.

Folks, some of my blog entries seem a little doomsday-ish. I am a super positive person; but the things our government has done trying to control out economy are going to keep us in a recession for a while. You better make sure you are planning for the worst and hoping for the best. If you have an FHA loan, programs for modification are coming out. Find out if you can qualify. Lock in current rates where you can.

Hi Everybody. Today I want to talk about Forensic Mortgage Audits; what are they, how they are supposed to work, and do they work. Many people out there today are having trouble with their mortgage. Clearly. There is a ton of misinformation out there regarding help as well. This firm used to do Forensic Mortgage Audits so we speak from experience. Let's talk about it.

A Forensic Mortgage Audit is basically an attempt to uncover mistakes or legal violations in you loan or loan documents. A company will tell you that they will audit your loan, find mistakes and then use them as leverage to force your lender to modify your loan. Sometimes they promise more like compensation or even getting your home for free. They are looking for several things in an audit: 1) RESPA Law violations; 2) TILA law violations;3) Accounting errors; and 4) other general irregularities or legal violations. So let's say they find some of these, what next?

The idea is that you can put legal pressure on your lender to modify your loan and put you in a position where you can pay your mortgage. These auditors assume that this can't be done without this kind of work. Sometimes they are right, it can't be done without this kind of pressure. For an explanation look at my series on how the Making Home Affordable Plan works, especially the income and expense piece. So let's say they've uncovered violations in your loan and you are in a situation where you otherwise wouldn't qualify for a loan modification. What does your bank/lender do when confronted with these problems?

They say, "go fly a kite". They don't care. They are FAR too busy with modifying loans for people who are going through normal channels to deal with extortion. Have you ever heard the phrase "you catch more flies with honey than with vinegar"? You are running into a situation where you are trying to force the banks to do something. How do you force the bank to do something they don't want to do? You have to sue them! Do you have at least $70,000 to front for a lawsuit? You can expect to spend at least that much. This is the fatal flaw in hiring a forensic mortgage auditor. You will pay far more money for one of two things: 1) The same result you would get trying to modify through regular channels or 2) No result because you don't qualify for a modification anyways. If you are considering hiring a forensic mortgage auditor you better think hard and check references carefully. This firm stopped doing it when we realized how far we got with honey.

Last time I explained that you could keep your car and home in Bankruptcy, if you want, and depending on the type of Bankruptcy you file; but what other property can you keep? This is an important question because many people don't realize that it's a common situation for the Bankruptcy Trustee to force the sale of assets to pay creditors. For simplicity we are going to cover just a little about Federal Exemptions as opposed to State Exemptions.

You can exempt household goods such as furniture, clothing, appliances, and the like. The aggregate value that can be exempt is $10,775. Jewelry can be exempt up to $1350 as long as it is held for personal and family use. There is also a "wild card" or "any property" exemption. This is an additional $1,075 for property not already covered/exempt. There is another $2,025 exemption for "tools of trade".

You can also keep most Life Insurance policies as long as they don't have a cash value. Life insurance policies, which do have a cash value get complicated; but generally can be exempt up to the cash value of $10,775.

Many people have expensive health aids like wheel chairs/scooters, artificial limbs, even specially equipped vehicles. These can all be exempt and although there are gray areas, if it qualifies there is no dollar limit.

There are also exemptions for all kinds or retirement benefits and other rights to future income. This gets complicated and is too extensive for this blog entry. As you can see there is a lot to consider when filing a Bankruptcy. If you have further/specific questions contact us! Consultations are free.